Pied-à-Terres, Rent-Backs and ADUs: Choosing the Right Insurance Coverage for your Rental
In today’s hot housing market, many home buyers are sweetening their offer by allowing the sellers to have a rent-back option. Doing so allows the sellers to stay in their home for anywhere from a few weeks to a few months after the home is sold. This seems to be more and more common in our seller’s market since more and more homeowners are choosing to sell their homes without a clear plan of where they’ll move to next. While this is a great way to put together a more competitive offer, you’ll want to check with your home insurance provider and lender to make sure it’s possible before entering escrow.
Read on to learn about insurance solutions when it comes to rental options for your home, future home, or investment property.
“Short-Term” May Not Mean What You Think
In insurance speak, a short-term rental is usually considered to be any time period less than 1 year. We most commonly think of short-term rentals as something like an AirBNB where tourists stay for a weekend or two. While this certainly qualifies as a short-term rental, it’s not the only situation in which a client may want to have this type of coverage.
According to insurance companies a seller who continues to live in a home for 30, 60, or 90 days after it’s sold to new owners is also likely to be considered a short-term tenant. Because of this, a new homeowner might want a landlord protector policy for a short-term rental. While this is the proper way to insure a situation like this, it can make it more difficult for clients who are working with a lender. Because of this, a client will want to work with their lender as well to make sure this sort of insurance set-up meets any loan requirements.
It Can Apply Even if You Use it as a Residence
Partnering with one Agency can save you time by providing you with one point of contact for everything insurance.
Even if you own a pied-à-terres that you occupy for part of the year and plan to rent for multiple months when you’re not in town, a short term rental insurance policy is likely more appropriate than a traditional home insurance policy.
This is because insurance often looks at the riskiest type of use for a property and protects for that. So even though you might only rent the property out for a couple months and live in it the majority of the year, insurance will consider the rental type of use to be the riskiest scenario. Therefore, the proper way to protect your investment is through a short term rental policy which covers you as a resident when you’re in town as well as any guests who stay there when you’re away. Of course, this only applies if there’s a formal rental agreement between you and a tenant. If you have family or friends stay with your permission without any sort of financial commitment or agreement, then a home insurance policy might be a better fit.
When a Homeowners Policy Might be a Better Fit
Alternatively there are a few scenarios in which it might be more appropriate to have a homeowners policy than a rental type of policy even if you do have tenants.
If you have a detached Accessory Dwelling Units (ADU), for example, with long term tenants, you might be able to add a rider on your home insurance policy to cover “separate structures rented to others”.
If you have only 1 or 2 long-term tenants in your primary home, then a homeowners policy might do the trick. In this scenario it might mean that this residence truly is your primary home and you either have a long-term roommate tenant or a tenant who resides upstairs while you occupy the first floor.
Whatever the potential rental scenario, we always recommend reviewing with your insurance professional to see how your future or current plans might affect your coverage. Our team is always happy to assist as your thought partner in all things insurance and welcome you to give us a call at 805-984-3777. We’re always happy to provide a free consultation to ensure your lifestyle is protected!